Winding Down Or Dressing Up?

Winding Down Or Dressing Up?: "♦ Winding down. The year-end holiday season is upon us, and this will increasingly have an impact on the market. As it stands, average daily trading volumes for the Main Market in Dec have already fallen by around 40% since end-Nov as investors wind down their activity.

♦ Window dressing for the year end? We believe there will be few reasons to window dress given the market is up 46.5% YTD as reflected by the FBM EMAS index (and up 43.6% based on the FBM KLCI). However, we note that eight times out of the last ten years, the FBM KLCI has closed the year higher vs. Nov of the same year. However, the data is less conclusive when compared against the Jan close of the same year, with higher returns for only five out of the last ten years. In any case, this year will clearly be positive on the Dec vs. Jan measure but history suggests that there is a good chance 2009 will close higher vs. Nov. Table 1 shows the stocks with a better-than-average track record over the last ten years of closing higher in Dec vs. Nov. We highlight the end-Dec share price performances (vs. end-nov) of the thirty largest stocks on Bursa Malaysia by full market cap.

♦ Second year slump? Looking further out, we are perhaps more concerned about historical data showing a slumping year for the equity market after a boom year. In 1999, the benchmark index closed up 38.6%, but this was followed by a 16.3% yoy decline at the close of 2000. The swing in the EMAS index was wider, with a 45.2% gain for 1999 and a 21.8% drop in 2000.

♦ January effect. What is also interesting is that 2000 also benefitted from the January effect, with the first month showing +13.5% gain vs. end- 1999. However, the rest of the year appeared to be dismal with the market dropping 26.3% between end-Dec 2000 vs. end-Jan 2000. Again, we note that the EMAS Index followed a similar trend in both instances.

♦ Tough market ahead. History would thus suggest that the beginning of 2010 could remain quite buoyant. However for now, the general consensus among investors appears to be that next year will be a tough
one for the equity market.

♦ Sector and stock calls still important. We thus believe that stock picking will still be important for 2010. Without pre-empting our 2010 Market Outlook & Strategy later this week, we believe the key sectors will still be the banks and commodities sectors (plantation and oil & gas). We believe strong cashflow companies will be attractive, as will highlyregarded companies as risk premiums may start to fall through the year.

By RHBinvest
Analyst: Yap Huey Chiang

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